Post on 21-Jan-2017
Understanding Ind AS CA PRANAV JOSHI, PARTNER | P. G. JOSHI & CO.
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 1
Ind AS 16 PLANT, PROPERTY & EQUIPMENT
Basics of Ind AS HOW IS IT FRAMED?
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 3
Framework
• Sets the basic boundaries of the standard;
• Gives definitions of key terms used in the standard Objective, Scope
& Definitions
• Tells us what can be accounted for in the books
• Does not tell the amount/value to be accounted Recognition
• Gives rules for arriving at the value at which the recognised item is to be accounted for
Measurement
• Gives principals for removing a recognised item De-recognition
• Information to be made available to the reader for better understanding of the financial statements
Disclosures
4 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Ind AS 16 PROPERTY, PLANT AND EQUIPMENT ( PPE)
Overview of the Session Objective, Scope
& Definitions
Recognition
Measurement
De-recognition
Disclosures
Initial Recognition
Subsequent Recognition
At Recognition
After Recognition
Cost Model
Revaluation Model
Depreciation
6 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Objective, Scope & Definitions
BASIC BOUNDARIES OF THE STANDARD
DEFINITIONS OF KEY TERMS USED IN THE STANDARD
7 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
The objective of this Standard is to prescribe the
accounting treatment for Plant, Property and
Equipment [PPE].
Objective
8 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
The Principal Issues in accounting for Property,
Plant and Equipment are:
Principle Issues
Particulars Ind AS Indian GAAP
Recognition of the Assets Ind AS 16 AS 10
Determination of their Carrying Amounts Ind AS 16 AS 10
Depreciation Charges Ind AS 16 AS 6
De-Recognition Ind AS 16 AS 10
9 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Scope
This Standard Shall be applied in accounting for PPE
except when another standard requires / permits
different accounting treatment
Scope Exception:
◦ PPE which has been classified as Held For Sale – Ind AS 105
◦ Biological assets related to agricultural activity – Ind AS 41
◦ Exploration and evaluation assets – Ind AS 106
◦ Mineral rights and Mineral reserves such as oil & non
generative resources
10 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions
PPE (IND AS 16)
All tangible Items that are
◦ Held for the purpose of
• Production or Supply of goods and services; or
• for rental to others; or
• for other administrative purposes; and
◦ Expected to be used during more than one period.
FIXED ASSETS (AS 10)
Fixed asset is an asset
◦ Held with the intention of
• being used for the purpose of producing or providing goods or services; and
◦ Is not held for sale in the normal course of business.
11 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
DEPRECIABLE AMOUNT (IND AS 16)
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
GROSS BOOK VALUE (AS 10)
Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements.
When this amount is shown net of accumulated depreciation, it is termed as net book value.
12 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions
Carrying Amount
◦ Amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses
Cost
◦ Amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition
or construction
Depreciation
◦ Systematic allocation of the depreciable amount of an asset over its
useful life.
13 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions (Contd.)
Definitions (Contd.)
Residual value
◦ Estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal.
Useful life
a. Period over which an asset is expected to be available for use by
an entity; or
b. Number of production or similar units expected to be obtained
from the asset by an entity.
14 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Recognition WHAT TO ACCOUNT FOR?
15 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
? ?
Ind AS 16
◦ The cost of an item of PPE shall be recognised as asset, if
and only if –
◦ it is probable that future economic benefits associated with the
item will flow to the entity; and
◦ cost of the item can be measured reliably
AS 10
◦ Any item which falls under the definition of a fixed asset
should be recognised as a Fixed Asset.
Initial Recognition
16 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
1. Spare Parts & Servicing Equipment
If they can be used only in connection
with an item of PPE
Recognition criteria are met?
Spare Parts and Servicing Equipment
Day to Day servicing & Consumables
Expense out Capitalise
No
Yes
Subsequent Recognition
17 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
2. Major Inspection
◦ Ind AS 16 requires that the cost of major inspections should be
capitalised with consequent de-recognition of any remaining carrying
amount of this cost of the previous inspection. Existing AS does not
deal with this aspect.
Subsequent Recognition
100% 80% 60% 40%
2011 2012 2013 2014
Inspection Cost
Cost of Asset
Derecognize
18 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Component Approach
“Each part of an item of property, plant and equipment
with a cost that is significant in relation to the total cost
of the item shall be depreciated separately.”
This inter se requires separate recognition of each
component. The same would require the auditor’s
judgment on:
◦ Separable criteria – Significant Cost
◦ Useful Life
19 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Particulars Allocated cost Residual value Useful life Depreciation
Keel 120,000,000 6,000,000 25
4,560,000
Bridge 70,000,000 10,500,000 2,380,000
Bulkhead 90,000,000 9,900,000 20
4,005,000
Propulsion system 30,000,000 3,000,000 1,350,000
Decks 100,000,000 5,000,000 15
6,333,333
Boiler 10,000,000 1,000,000 600,000
Refrigeration system 20,000,000 4,000,000 11
1,454,545
Fresh water generator 10,000,000 1,000,000 818,182
Total 45,00,00,000 4,04,00,000 2,15,01,060
Component Approach (Example)
20 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Q&A A company installed a turbine in 2007. It bought another turbine
in 2009 as backup in case the installed one fails. Cost of the 2nd is
nearly same as the 1st, and probability that it will be used is quite
low. It classifies the 2nd turbine under inventory as an
“emergency spare”?.
Q – Is this accounting correct?
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A – No. Though use of this stand-by equipment will be irregular, it fulfils both conditions of recognition and is a PP&E to be separately depreciated over the shorter of its expected useful life (from 2009) or the life of the plant the turbine is part of.
Q&A
Company M buys five new machines for use in its
production facility. Simultaneously, it purchases a spare
motor to be used as a replacement if a motor on one of the
five machines breaks.
Q – Should the spare motor be classified as PP&E?
22 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
A – As this major spare will be used in production of goods,
and once brought into service, will be operated during more
than one period, it should be classified as PP&E.
AMOUNT INITIALLY TO BE ACCOUNTED FOR
Measurement at Recognition
23 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset ?
Measurement at Recognition – At Cost
An item of PPE that qualifies for recognition as an asset
should be measured at its cost.
Elements of Cost
◦ Purchase price
◦ Directly attributable costs to bringing the asset to the location
and condition necessary for it to be capable of operating in the
manner intended by management.
◦ Initial estimate of dismantling, removal and site restoration
costs (recognized and measured in accordance with Ind AS 37
Provisions, Contingent Liabilities and Contingent Assets)
24 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Elements of Cost
Purchase Cost Including Taxes, Net off rebates
Direct Attributable Costs to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Eg: Site Preparation, Professional Fees, Freight.
Initial estimate of dismantling, removal and site restoration costs Estimated cost of leaving the land in the condition as it was acquired Eg: Mining Industry, Nuclear Power Plant.
25 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Purchase Price
Cash Purchase: Cash Price Equivalent at the time of
recognition.
◦ If the payment is deferred, the price is discounted to the
PV at the time recognition.
Exchange of Assets
◦ Fair value of the asset given up, unless the Fair value of
acquired asset is more clearly evident.
26 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Q&A A company acquired a machine that its employees had never operated
before. During installation, employees received intensive training. Cost
includes hiring of trainers + directly attributable cost of employee wages
for the training days. Without training, the machine could not have
been used.
Q – Can the training costs expenses and employee wages be
capitalised?
27 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
A – The Training costs can be directly attributable to the operating of
the machine. The employee wages will not be directly attributable.
Cessation of recognition
Recognition of costs in the carrying amount of an
item of property, plant and equipment ceases
when the item is in the location and condition
necessary for it to be capable of operating in the
manner intended by management.
28 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Cessation of recognition
Purchase Cost Direct Attributable Costs
Initial estimate of dismantling, removal and site restoration costs
January, 2016 March, 2021
Cessation of Recognition
March, 2016
29 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Present Value (PV)
Dismantling, Removal & Site Restoration (part of Ind AS 37)
March, 2016 (PV @ 10%)
March, 2021 (Absolute)
Rs. 62.09 Rs. 100
31.03.2017 Depreciation A/c. Dr. Rs. 12.42 (Rs. 62.09/5 Years) To PPE Rs. 12.42 (Rs. 62.09/5 Years) P&L A/c. Dr. Rs. 6.209 (Rs. 62.09 * 10%) To Prov. For Dismantling Liability Rs. 6.209 (Rs. 62.09 * 10%)
Unwinding of Discounting
30 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
31.03.2016 PPE A/c Dr. Rs. 62.09 To Prov. For Dismantling Liability Rs. 62.09
Illustration Year PPE A/c
(PV of Cost) P&L A/c
Unwinding @ 10% of provision amount)
Provision A/c
Dr. Dr. Cr.
31-03-16 62.09 - 62.09
31-03-17 - 6.21 68.30
31-03-18 - 6.83 75.13
31-03-19 - 7.51 82.64
31-03-20 - 8.26 90.91
31-03-21 - 9.09 100.00
Total 62.09 37.91
Total amount required for dismantling!
31 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Recognition – Other considerations
Expenditure and Income from incidental Operations
before or during construction/development not in
connection with construction/development are not
recognized as PPE (Para 21). For example, incidental
income during construction.
Self constructed assets should exclude
◦ Internal profits;
◦ Abnormal wastages eliminated; and
◦ Borrowing cost only to the extent recognized under Ind AS 23
(Para 22)
32 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
POST CAPITALIZATION ACCOUNTING
Measurement after Recognition
33 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx +/- ?
Subsequent Measurement
Accounting Policy to applied to entire class of asset
Accounting Policy
Cost Model
Cost
Less Accumulated Depreciation
Less Impairment Losses
Revaluation Model
Revalued amount
Less Subsequent accumulated
Depreciation
Less Impairment Losses
34 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Class of Asset A class of property, plant and equipment is a grouping
of assets of
a similar nature and
use in an entity’s operations.
The following are examples of separate classes:
◦ Land Land And Buildings
◦ Machinery Ships
◦ Aircraft Motor Vehicles
◦ Furniture & Fixtures Office Equipment
35 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Revaluation Model – Basic Rules
I. Revaluation Should be done for entire class of
PPE
II. Revaluation should be done at sufficient
regularity
• Frequency of revaluation depends upon the volatility
of change in the fair value.
36 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
At fair value
Done for class
of assets
Increase Decrease
Disclosed as part of Equity as
“Revaluation Surplus”
If Credited to P&L
Before, Debit to
that extent
Adjusted against existing
“Revaluation Surplus”
Credited to
Income
statement
Revaluation Model
37 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Revaluation Model
38 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Reval. Surplus Asset P&L (Income) Asset
P&L (Income) Reval. Surplus
Asset P&L (Income) Reval. Surplus
Asset
Upward Revaluation - Initial Downward Revaluation - Initial
Downward Revaluation - Subsequent Upward Revaluation - Subsequent
Depreciation
39 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx +/- yyy
Depreciation
Systematic allocation of the depreciable amount
of an asset over its useful life.
◦ Depreciable Amount = Cost – Residual Value
◦ Useful Life = Period or Production
◦ Systematic Basis = Depreciation Method (SLM, WDV or
Units)
◦ Residual value and useful life to be reviewed at end of
each financial year
40 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Component Approach
◦ Each part of an item of PPE with a cost that is significant
to total cost shall be depreciated separately.
◦ An entity shall allocate total cost to significant parts of an
asset and depreciates separately each such part.
◦ More than one significant parts can have same useful life
and depreciation method such parts may be grouped in
determining the depreciation charge.
Depreciation
41 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Particulars Allocated cost Residual value Useful life Depreciation
Keel 120,000,000 6,000,000 25
4,560,000
Bridge 70,000,000 10,500,000 2,380,000
Bulkhead 90,000,000 9,900,000 20
4,005,000
Propulsion system 30,000,000 3,000,000 1,350,000
Decks 100,000,000 5,000,000 15
6,333,333
Boiler 10,000,000 1,000,000 600,000
Refrigeration system 20,000,000 4,000,000 11
1,454,545
Fresh water generator 10,000,000 1,000,000 818,182
Total 45,00,00,000 4,04,00,000 2,15,01,060
Component Approach (Example)
42 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Depreciation
“The depreciation charge for each period shall be
recognized in profit or loss unless it is included in
the carrying amount of another asset”
If future economic benefits are embodied / absorbed in
producing another assets than the depreciation charge
constitutes part of the cost of the other asset and is
included in its carrying amount.
For example, the depreciation of manufacturing plant and equipment
is included in the costs of conversion of inventories (Ind AS 2).
43 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
When to Start?
Depreciation begins when the asset is available for
use i.e. when it is in the location and condition
necessary for it to be capable of operating in the
manner intended by management.
44 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
When to Start?
Purchase Cost Direct Attributable Costs
Initial estimate of dismantling, removal and site restoration costs
January, 2016 March, 2026
March, 2016 Capitalize
Depreciate
45 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Depreciation is recognized despite fair value
exceeding carrying cost, unless residual value
exceeds carrying cost.
◦ Where residual value increases to an amount equal to or
more than carrying cost, there is no depreciation charge
till the residual value reduces
Other Issues
RV
BV
/CA
RV
BV
/CA
Depreciate Do not Depreciate
46 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Cessation of Depreciation
Depreciation of an asset ceases at the earlier of the
date that
◦ the asset is classified as held for sale (or included in a
disposal group that is classified as held for sale) in
accordance with Ind AS 105; and
◦ the date that the asset is derecognized.
47 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Shall reflect the pattern in which the asset’s economic
benefits are expected to be consumed
Method applied to be reviewed at end of each financial year
Method selected is to be applied consistently unless there is
a change in the expected pattern of consumption of
economic benefits from the asset
Change in method of depreciation is to be treated as a
change in the estimate (Ind AS 8) (As against change in
accounting policy as per current AS 6)
Depreciation Method
48 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Accounting for Accumulated Depreciation on Revaluation
Two ways are:
1. Accumulated Depreciation to be restated
proportionately with the change in the gross carrying
amount of the asset so that the carrying amount of the
asset after revaluation equals its revalued amount.
49 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Accounting #1
Asset A/c Depreciation Reserve A/c
P&L A/c Revaluation Surplus A/c
Bank Rs. 100 P&L Rs. 10 P&L Rs. 10
Dep. Res. Rs. 10 Dep. Res. Rs. 10
Asset A/c Rs. 50
Original Cost of Asset = Rs. 100 Revalued Amount = Rs. 120
P&L Rs. 10 Rev. Res Rs. 50
Dep. Res. Rs. 10
Cost = Rs. 100 CA = Rs. 80 Cost = ? CA = Rs. 120
Cross Multiply: 100 x 120 = Rs. 150 80
Dep. Res. Rs. 10
Revised Depreciation = 150 x 10% x 2 = Rs. 30
50 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Accounting for Accumulated Depreciation on Revaluation
2. Accumulated Depreciation to be eliminated against the
gross carrying amount of the asset and the net amount
restated to the revalued amount of the asset.
51 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Accounting #2
Asset A/c Depreciation Reserve A/c
P&L A/c Revaluation Surplus A/c
Bank Rs. 100 P&L Rs. 10 P&L Rs. 10
Dep. Res. Rs. 10 Dep. Res. Rs. 10
Asset A/c Rs. 40
Original Cost of Asset = Rs. 100 Revalued Amount = Rs. 120
Asset Rs. 20
Rev. Res Rs. 40
Dep. Res. Rs. 20
Net Carrying Amount = Rs. 100 – Rs. 20 = Rs. 80 Revalued Amount = Rs. 120 Increase is Gross Amount = Rs. 120 – Rs. 80 = Rs. 40
52 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Accounting for Revaluation Surplus
53 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Balance in Revaluation Surplus may be transferred to
Retained Earnings on disposal of asset.
However, some of the surplus may be transferred as the
asset is used by an entity in proportion to the depreciation
charged. However, transfers from revaluation surplus to
retained earnings are not made through profit or loss.
Such accounting will result in lower Profits as depreciation
on revalued portion is not routed through P&L A/c.
Accounting #Revaluation Surplus Asset A/c Depreciation Reserve A/c
P&L A/c Revaluation Surplus A/c
Bank Rs. 100 P&L Rs. 10 P&L Rs. 10
Dep. Res. Rs. 10 Dep. Res. Rs. 10
Asset A/c Rs. 40
Asset Rs. 20
Rev. Res Rs. 40
Dep. Res. Rs. 20
Other Comprehensive Income
Rev. Res. Rs. 2
Depr. on Revalued Gr. C.A. = Rs. 12 (Rs. 120 x 10%) Depr. on Original cost = Rs. 10 (Rs. 100 x 10%) Difference = Rs. 02
Gen Res. Rs. 2
54 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Dep. Res. Rs. 12
P&L Rs. 12
Impairment & De-recognition REMOVING A RECOGNIZED ITEM
55 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx +/- yyy
Impairment
To determine whether the item of PPE is impaired
or not Ind AS 36 is to be applied.
56 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
De-recognition
Upon disposal (Sold or Entering into Finance Lease)
OR
When no future economic benefits are expected
from its use or disposal
Resultant gain or loss is included in the profit and
loss statement wherein gain is not classified as
‘revenue’
57 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Disclosure
58 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
PPE A/c
Asset xxx +/- yyy
Notes: …?
Disclosures
59 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
For each class of property, plant, and equipment,
disclose:
◦ basis for measuring carrying amount –Cost or Revaluation
◦ depreciation method(s) used
◦ useful lives or depreciation rates
◦ gross carrying amount and accumulated depreciation and
impairment losses
Disclosures
60 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Reconciliation of the carrying amount at the
beginning and the end of the period, showing:
◦ Additions / disposals
◦ Acquisitions through business combinations
◦ Revaluation increases or decreases
◦ Impairment losses / reversals of impairment losses
◦ Depreciation
◦ Net foreign exchange differences on translation
◦ Other movements
Thank You CA Pranav A. Joshi
Partner
P. G. Joshi & Co. , Chartered Accountants
www.pgjco.com